Global IPO activity has continued to climb with around 850 flotations raising $187bn in the first nine months of 2014. London IPOs are widely expected to reach record levels with main market listings estimated to have raised over £12bn so far this year.
Despite the hype and the flurry of activity, the number of publicly listed companies is much lower today than it was 20 years ago. It is estimated that in the US and Europe, the number of listed companies has fallen by 50% and 23% respectively since 1997. Why? Public listings are not suitable for everybody and many organisations have elected to steer clear. Decision makers considering an IPO should seek appropriate professional advice as a trade sale or private equity fundraising could be the better option.
So why are there fewer publicly listed companies? Many plcs disappeared in the Dotcom crash in 2000 and in the fall-out of Enron in 2008. The resulting regulations (e.g. Sarbanes-Oxley) and enhanced scrutiny of public companies has significantly increased the cost of compliance, encouraging some companies to ‘go private’ (e.g. Heinz, Dell). These onerous rules and regulations also act as a deterrent for companies thinking of listing as decision makers determine that costs outweigh the benefits.
Organisations have also evolved. Particularly in the Media & Technology sector, but broadly speaking across the developed world, the companies of today are less capital intensive and are able to generate positive cash flow sooner. Furthermore, capital assets tend to be more flexible than they used to be, and financing models have evolved – you can now lease assets rather than buy or build them internally. Although corporations continue to invest in long-term growth plans, many armed with significant cash balances are returning cash to shareholders through dividends or buy-backs. Some of the largest organisations in the US (e.g. Apple, IBM and Exxon) have bought back more than $500bn of their own shares over the past 12 months.
Cash in or cash out?
The traditional view of raising capital from public equity markets for investment has changed. Many of the recent IPOs have instead been an exit route for investors. Private equity firms, in particular, have used IPOs market to realise these investments (e.g. Pets at Home, Saga, RAC, AA, Just Eat). Despite the success of ‘junior’ markets such as AIM in London, investors in public companies have focused increasingly on investing in larger companies, which has resulted in fewer smaller and mid-cap groups seeking and IPO and private equity investors stepping in to satisfy the demand for capital growth.
Walking the tightrope
Many IPOs have been successful, with the most notable recent example being Alibaba which raised $25bn, making it the largest IPO in history. Some smaller listings have also had successful IPOs – McColl’s, a UK retailer, raised £50m in January 2014. However, several other recent IPOs have been disappointing leaving investors underwhelmed. These include:
- Saga, one of London’s recent high profile flotations, was priced in May at 185p leaving investors which subscribed to the listing sitting on paper losses of 6%;
- One Savings listed at a value of £413m, significantly below the £600m target that its stakeholders were expecting;
- Jimmy Choo was listed with its shares priced at the bottom of its narrowed price range; and
- Rocket Internet and Zalando both produced lacklustre performances on their debut.
Brokers are warning that shareholder appetite for stocks is waning. This is partly the inevitable consequence of recent market volatility. The increased competition for new listings is also leading to downward pressure on after-market performance, forcing fund managers to be more selective with their choices. Blackrock, a leading institutional investor, recently voiced concerns over the quality of European IPOs, as they increased their bets against private-equity backed flotations.
These factors have forced some companies to reconsider their IPO plans. Companies such as Fat Face, New Look and Urban Exposure all cancelled plans to list citing challenging public markets and have chosen instead to remain private and focus on developing their businesses. Most recently, challenger banks Aldermore and Virgin Money became the latest casualties of deteriorating public markets, after both companies decided to delay listing until market conditions calmed.. Hellman & Friedman are also expected to delay plans to list Scout24, the German classified listings business.
M&A – the better way?
A less risky and potentially more profitable alternative to IPO is a private sale to a strategic acquirer or private equity investor. The global M&A market is buoyant – in H1 2014 global M&A deals valued at over $1,570bn resulted in the highest valued half year since 2007. Deal value increased 56.3% compared to H1 2013 ($1,005bn) and was 29.8% higher when compared to H2 2013.
Many corporations are becoming increasing acquisitive as they are keen to take advantage of strong stock prices, ample cash reserves and cheap available financing. Apax Partners chose to shelve plans to float Travelex in favour of a private offer of c.£900m, approximately 10% – 20% more than had been anticipated through an IPO. This implies that float price multiples have fallen to a level where synergies can allow a strategic buyer to pay more than fund managers.
An alternative option is a dual-track process. This involves simultaneously filing for an IPO, whilst also pursuing a private sale. The process allows the selling company to look for a better price with a private investor as public markets remain fickle. Open International recently employed this strategy and ultimately accepted a private offer of £276m from Montagu Private Equity.
How to decide?
An IPO may not be the most appropriate or profitable route for organisations and their existing shareholders. The governance requirements and cost (both initial and ongoing) can be too significant for some companies. Sometimes the less risky and more profitable solution is to pursue a private sale with a strategic buyer or a partial exit with private equity.